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Exhibit 99.1
Final Transcript
Conference Call Transcript
CHS — Q1 2011 Chicos FAS Earnings Conference Call & Webcast
Event Date/Time: May 18, 2011 / 12:30PM GMT
CORPORATE PARTICIPANTS
Bob Atkinson
Chico’s FAS, Inc. — VP, IR
Chico’s FAS, Inc. — VP, IR
David Dyer
Chico’s FAS, Inc. — President & CEO
Chico’s FAS, Inc. — President & CEO
Kent Kleeberger
Chico’s FAS, Inc. — EVP, COO & CFO
Chico’s FAS, Inc. — EVP, COO & CFO
CONFERENCE CALL PARTICIPANTS
Paul Alexander
Bank of America-Merrill Lynch — Analyst
Bank of America-Merrill Lynch — Analyst
Elizabeth Howell
Raymond James — Analyst
Raymond James — Analyst
Edward Yruma
KeyBanc Capital Markets — Analyst
KeyBanc Capital Markets — Analyst
Jennifer Black
Jennifer Black & Associates — Analyst
Jennifer Black & Associates — Analyst
Tom Filandro
SIG — Analyst
SIG — Analyst
Liz Pierce
ROTH Capital Partners — Analyst
ROTH Capital Partners — Analyst
Janet Kloppenburg
JJK Research — Analyst
JJK Research — Analyst
Margaret Whitfield
Sterne, Agee — Analyst
Sterne, Agee — Analyst
Neely Tamminga
Piper Jaffray — Analyst
Piper Jaffray — Analyst
Tracy Kogan
Nomura Capital — Analyst
Nomura Capital — Analyst
Robin Murchison
SunTrust Robinson Humphrey — Analyst
SunTrust Robinson Humphrey — Analyst
Lindsey Bell
JPMorgan Chase — Analyst
JPMorgan Chase — Analyst
Adrienne Tennant
Janney Montgomery Scott — Analyst
Janney Montgomery Scott — Analyst
Dana Telsey
Telsey Advisory Group — Analyst
Telsey Advisory Group — Analyst
Travis Williams
Stephens Inc. — Analyst
Stephens Inc. — Analyst
Betty Chen
Wedbush Securities — Analyst
Wedbush Securities — Analyst
PRESENTATION
Operator
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Greetings and welcome to the Chico’s FAS, Inc. first-quarter 2011 sales and earnings
conference call. At this time, all participants are in a listen-only mode. A brief
question-and-answer session will follow the formal presentation. (Operator Instructions). As a
reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.
Robert Atkinson, Vice President of Investor Relations for Chico’s FAS. Thank you, Mr. Atkinson. You
may begin.
Thanks, Jackie and good morning, everyone. Welcome to the Chico’s first-quarter earnings
conference call and webcast. Dave Dyer and Kent Kleeberger join me here at our National Store
Support Center in Fort Myers.
Before Dave begins his executive overview, I must remind you of our Safe Harbor statement. Certain
statements made this morning, including without limitation statements addressing the beliefs,
plans, objectives, estimates or expectations of the Company or future results or events constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 as amended.
Such forward-looking statements involve known or unknown risks, including but not limited to
general economic and business conditions and conditions within the specialty retail industry. There
can be no assurance that future results, performance or achievements expressed or implied by such
forward-looking statements will occur.
Users of forward-looking statements are encouraged to review our latest Annual Report on Form 10-K,
our filings on Form 10-Q, Management Discussion and Analysis in the Company’s latest Annual Report
to shareholders, our filings on Form 8-K and other federal securities laws filings for a
description of other important factors that may affect the Company’s results of operations and
financial condition.
The Company does not undertake to publicly update or revise these forward-looking statements even
if experience or future changes make it clear that projected results expressed or implied by such
statements will not be realized.
Please note that we will file an 8-K with the SEC that will include a transcript of today’s
conference call and webcast. With that, I will turn it over to Dave Dyer.
Great. Thanks, Bob and good morning to everyone. At this year’s analyst call recently in
March, I used a three-stage hospital metaphor to describe the Chico’s FAS turnaround over the last
couple of years. The first stage was the emergency room. During this stage in 2009, we focused on
saving the Chico’s FAS patient. We cut expenses, downsized the organization, refocused on the
customer, improved our product, improved our inventory turn and brought in key senior-level talent.
During the second stage in 2010, we were in the recovery room, not fully healed but definitely
healthier. Our customers were responding to our improved product offerings and we concentrated on a
goal to return our Company to historical financial performance.
And in 2011, we are now in the third stage, home at last, healthy again and ready for sustainable
profitable growth. In addition to our high-performance expectations, we are focused on retaining
and attracting the outstanding talent necessary for continued success in sector-leading financial
results.
With a positive 7.7% comp on top of last year’s 16% comp, in addition to our earnings improvement
of 30%, I believe that our first-quarter results are an indication of the success of our turnaround
efforts. At that same analyst meeting, I spoke of our three-year plan that gives us the roadmap for
a potential achievement of our BHAG stretch financial goals. $1 per share for 2011, which I said
over two years ago and most recently, $1.50 a share for fiscal 2013.
While both of these goals are certainly stretch targets, with the success of several margin and
expense initiatives now underway, sales a bit over plan and our planned 100 plus a year new store
openings and of course, a little luck, we believe we can achieve these goals.
We see growth opportunities for all three of our brands. Over the next three or four years, the
Chico’s brand has the combined potential to open another 150 front-line and outlet stores. We
opened 10 Chico’s stores in this first quarter.
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At White House Black Market, we are increasing the growth rate. We have the combined opportunity to
open 250 plus [outlet] stores. We will concentrate on store openings first. Before we can
aggressively grow the White House Black Market outlets, we must increase the penetration of
made-for-outlet product, which requires additional merchant and product development staffing that
is now underway.
At Soma Intimates, we opened 20 boutiques and outlets in the first quarter towards our target of 54
new stores this year. At year-end, Soma should have about 180 boutiques and sufficient scale to
allow us to leverage our sourcing cost and brand overhead.
We are finally finding our voice in Soma. Our 30 to 70-year-old customer generally shops higher-end
department stores and specialty stores. We are winning her over with our fashion, our fit and our
amazing personal service. We pick up where Victoria’s Secret leaves off.
We also believe after some starts and stops over the years that we have the right store model for
Soma Intimates. We are now concentrating on building volume and improving store operating
efficiencies. I am pleased to report that this first quarter was Soma’s highest comp store growth
rate since 2008, as well as its smallest quarterly loss.
It is particularly encouraging that our results for the first quarter not only exceeded our
expectations, but were successful in all three brands. As of yesterday, our second quarter is
continuing momentum of the first quarter. According to our daily sales flash report this morning,
our total sales through yesterday are up nearly 14% and our total comp, including DTC, is up
slightly over 9%. Again, this is not guidance or a quarterly sales projection; it is merely a
snapshot indication of where we stand two and a half weeks into the quarter.
You may remember that the 2010 second-quarter call where I commented that we left several points of
comp and several pennies of earnings on the table due to the lack of wear-now product in the
Chico’s brand, the lack of clearance for White House Black Market and several merchandising
delivery snafus.
I believe that we will transition our assortments more effectively this year from second quarter to
third quarter, have competitive July promotions and perhaps a little upside to our plan weather
permitting. If it snows in July, all bets are off. With that, I am going to turn it over to our new
COO, Kent Kleeberger.
Thanks, Dave. Good morning, everyone. For the latest quarter, total net sales increased 11.5%
from a year ago to a record in the first quarter of $537.2 million. Total enterprise comparable
sales, including direct-to-consumer, increased 7.7% on top of a 16% increase in the prior year’s
first quarter. Quarter-over-quarter DTC sales alone increased 47.4% for the Company with all brands
enjoying more than 40% growth in this channel.
By brand, Chico’s and Soma Intimates’ combined comparable store sales, including DTC, increased
7.8% while White House Black Market delivered a 7.4% increase in comp sales for the quarter. Gross
margin expressed as a rate of net sales increased 60 basis points to 59.1%. The rate increase came
from higher margins produced by Chico’s and White House Black Market front-line boutiques,
primarily driven by improved in-season sell-throughs in the current period versus the linked period
last year.
Selling, general and administrative expenses expressed as a percentage of sales decreased 150 basis
from a year ago coming from the leverage associated with the comparable store sales increase.
However, on a dollar basis, SG&A increased $18.3 million, including a $580,000 net increase over
last year in store-related impairment charges.
The increase in SG&A dollars is primarily attributable to increased store and direct operating
costs associated with the 85 net new stores opened since first quarter 2010, along with higher
credit card fees resulting from higher sales, plus $1.8 million in additional marketing expense,
largely attributable to Soma Intimates’ incremental television advertising campaign during April.
The effective tax rate for the first quarter of 2011 was 37.3%, higher than last year’s
first-quarter rate of 36.2%. 2009’s lower rate came from a favorable tax court ruling resulting in
the restoration of a state income tax receivable.
Diluted weighted average shares outstanding decreased by 2.7 million, primarily due to our
repurchase of shares in the open market beginning last August.
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Reviewing our balance sheet, cash plus marketable securities as of April 1 reached $566.2 million,
an $84.3 million increase in those current assets from a year ago and that is after paying $30.2
million in cash dividends to shareholders and $55.7 million in share repurchases since the end of
first quarter 2010 and we remain debt-free.
Total inventories at the end of first quarter increased $38.1 million or up about 23.7% compared to
the 2010 period while net store selling square footage grew by about 7.6%. However, excluding an
approximate incremental $9.6 million attributable to in-transit merchandise coming from a shift in
deliveries of goods from air to less expensive ocean freight, inventory per selling square foot
increased about 9.5%.
Aside from the increase in in-transit inventories, there were other factors contributing to the
increase per square foot. First, we have increased our inventory commitments to support DTC growth.
Next, inventory purchased to support 21 net new boutiques and outlet openings in the May/June
timeframe comprises about 2% of the increase, plus our average unit cost in the Chico’s brand is up
about 2%.
More importantly, if you were to compare the inventory in terms of inventory per square foot over a
two-year timeframe versus the two-year comp increase, our inventories without in-transit would be
up 14.2% per square foot versus the two-year comp trend of 23.7%.
Finally, we left money on the table last year as we did not have enough wear-now merchandise, in
part due to our [beat-the-plan] first quarter of 2010 given the 16% comp increase. Plus, we were
broken in sale goods inventory late June through early August 2010.
Accordingly, we believe we have improved the positioning of our inventory this year, an action that
works to take advantage of what we believe is the second-quarter opportunity for both wear-now
goods and end-of-season promotion.
Capital expenditures for the 2011 quarter, including investments in new, relocated and remodeled
and expanded stores, totaled $16.2 million compared to $15.3 million for the linked period last
year. It is worth noting here that we opened twice as many new stores in the 2011 quarter compared
to first quarter last year. The increase in CapEx related to stores was offset by a decrease in
information technology expenditures compared to last year’s first quarter.
The end-of-quarter combined boutique and outlet square footage amounted to approximately 2.859
million square feet. During the quarter, Soma Intimates opened 16 front-line boutiques under the
FAS store strategy or pop-up strategy, opened four outlets and closed two boutiques and two
outlets.
White House Black Market opened nine boutiques, closed one and opened three outlets. And Chico’s
brand opened eight outlets, closed four front-line boutiques and opened two front-line boutiques in
the mid-tier markets of Roanoke, Virginia and Morgantown, West Virginia. Chico’s FAS ended the 2011
quarter with 1184 stores compared to 1099 stores at the end of first quarter 2010.
Now, looking at second quarter 2011, while not providing specific EPS guidance, we are operating
under the following assumptions. We are targeting a mid-single-digit comparable store sales
increase for Chico’s FAS, an estimate that includes DTC sales. This comp sales increase accompanied
by the addition of 30 net new stores should result in a net sales percentage increase in the
mid-teens for the quarter. We are planning the gross margin rate of sales to be up slightly, an
increase that should incorporate improved markdown rates.
Our SG&A rate of sales should reflect leverage similar to that in the first quarter resulting from
a positive comp and continued effective expense control, partially offset by a small increase in
marketing expenditure.
As we said on the February call, we are assuming an income tax rate in the range of 37% to 38% for
the second quarter, as well as the balance for 2011. Also, we assume no future share repurchase in
our model even though that statement may not necessarily reflect our intentions.
As to annual consolidated cash flows for 2011, we are now projecting capital expenditures at
approximately $130 million reflecting the acceleration of our distribution center 2 expansion plans
from 2012 to 2011. This acceleration results from our taking advantage of the 100% bonus
depreciation under current IRS tax regulation, among other considerations. Depreciation and
amortization is expected to be approximately $100 million for 2011. With that, I will turn it back
over to Bob to introduce the Q&A session of today’s call.
Thanks, Ken. Before Jackie gives us the procedure for queuing for questions, I would ask that
each questioner limit themselves to one question and to one follow-up. In this way, we will be
better able to accommodate as many questioners as time permits. You’re welcome to get back in the
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queue to ask a question in the same manner you did originally. Just as a warning here, we plan to
end the call at 9.30 Eastern time. With that, Jackie, how may security analysts indicate a
question?
QUESTION AND ANSWER
Operator
(Operator Instructions). Lorraine Hutchinson, Bank of America-Merrill Lynch.
Good morning, guys. It is Paul Alexander for Lorraine. So my question is on Soma. This was a
historically strong comp for that brand. What drove that? Is it getting the Vanishing Back bra back
in stock or was it apparel strength? And what were comparisons for the brand like? I think you said
last quarter that Soma’s compares were kind of easy. And then lastly, are Soma comps still leading
the Company and when do you guys think you might start reporting the Soma results broken out on its
own? Thanks.
Soma comps are still leading the Company and I would say that their success is probably
threefold. One certainly is the right product and both our bra categories and our apparel
categories are doing very well.
Secondly, I could say that there has been certainly an attention to driving margin, which is paying
off. And third, there has certainly been an increased emphasis on store operating efficiency. And
when you take all three of those together, I think it is producing the results. We are seeing — we
are seeing the stores successfully build and are having a lot of the new stores that we opened
certainly have the potential for success. Of our FAS stores, it has been a little over 80% of our
FAS stores that are going to be full-line stores coming up. And we have only had about — a little
bit less than 20% that have been — we want to discontinue. Kent, anything else you want to add on
that?
No, I think that pretty much summarizes it.
Elizabeth Howell, Raymond James.
Good morning. With comps up 9% quarter-to-date, can you just walk us through your comparisons
for the rest of the quarter, if they get tougher or easier and did the compressed calendar between
Easter and Mother’s Day impact your business significantly?
Well, I think in comparison to last year when we ended the quarter, July was actually a
negative comp last year. And I think for the reasons we said on the inventory, we were missing a
lot of wear-now merchandise and we didn’t have enough clearance. So we began to see business slip
probably in June week four of last year and continued through the early part of August. In fact, I
think August last year was slightly negative as well.
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The early part of the quarter last year was strong comps.
Okay, great. And then just on Mother’s Day and Easter, the compressed calendar, did that
impact your business?
Obviously, April was better than March, so with the shift, the Easter shift. I would also say
that we had a very successful Mother’s Day period and I think it may have been perhaps Chico’s
largest sales week ever leading up to that.
The comps that we have done so far in the first part of April, we have comped over one of our
largest weeks in the Chico’s brand that they have during the whole year. So I think that is at
least off to a good start.
Edward Yruma, KeyBanc Capital Markets.
Thanks very much for taking my question. I think you had indicated that averaging cost in the
embedded inventory was up about 3%. Could you talk about kind of how you are seeing pricing for the
remainder of the year and if you have seen any additional upward pressure?
The average unit cost was with the Chico’s brand only and that was up about 2%. I think we
indicated to a number of people that part of our strategy to compete against the increase in
average unit cost was to raise price. And I would say with respect to the apparel brands, our
average unit retails were up somewhere north of about 6% for the quarter. And I look for that trend
to continue for the balance of the year. In fact, the other pieces to take into consideration, we
are counting on some significant markdown saves in the fall season, coupled with perhaps some
improvement in our couponing strategy via lower discounts.
Great, and one follow-up. In terms of — in thinking about the longer-term margin opportunity
to improve the penetration of made-for-outlet, how should we think about that? And I know you said
you are hiring for that now. What is the potential timing on that? Thank you.
Well, I think that we have to have the infrastructure in place before we can make a
significant increase in made-for-outlet products. So we are planning to begin staffing up in the
very near future. Probably in the fall so that by fiscal year 2012, we can roll out White House in
a similar cadence that we did with Chico’s when their made-for-outlet penetration increased
significantly.
Jennifer Black, Jennifer Black & Associates.
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Good morning. Let me add my congratulations. My first question has to do with White House
Black Market. I wondered if you could talk a little bit about denim and suiting categories, the
potential you see there and any other categories with significant opportunities?
Suiting has been terrific. We launched the Work Kit in White House Black Market, which we
believe is an important part of our assortment, especially in the urban stores. And I think you
will see us continuing that on a year-round basis. Denim has been, I guess, soft as we went through
the spring season. And I think that we are cautious in the denim assortments, especially in White
House Black Market.
So while I think the denim business has been somewhat soft, their bottoms business in
sportswear has been nothing short of outstanding. So arguably, it is competing a little bit, but I
think bottoms also support the wear to work as well.
Great. And then I have a follow-up question on Soma. It appears you have a lot of great tops,
but you are lighter on the bottoms business and it also seems like you have less shapewear at least
right now and it looks like your PJs blew out over Mother’s Day. I just wondered when you will get
back in stock. Is this a West Coast thing? It seems like you are just really chasing.
Well, I would say when it comes to the apparel part, there are two things that we have done.
One, we have reduced the inventory in apparel. We had it in the last couple of years where we just
weren’t turning fast enough and we had too much apparel clearance in the Soma boutiques. And that
affected our full-price business. I think we are at the point in apparel where we would like to
sell out of things and we would like to create a sense of urgency like we have in the other brands.
In terms of bottoms to tops, I think tops will continue to be a part of our business, and we are a
little light right now, but really we focused on dresses for this spring and I think that that has
paid off for us.
The shapewear business, Jennifer, has not ever really been a strong business for Soma. I think
we are still trying to figure it out, but really it is under like 5% of total sales. So it is not
as important as the other portions of foundation.
Tom Filandro, SIG.
Thank you very much and my congratulations as well. Great quarter. With your comments on
inventories, I think you noted a couple things, more wear-now goods, higher commitments at DTC and
I believe you said clearance type goods. So it is kind of a two-part question. What impact will the
higher commitments have if any on IMU as you are buying more clearance and how should we think
about quarter-end inventories entering the third quarter or exiting the second quarter? Thank you.
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Well, I think typically if you are buying more goods, you are going to basically get leverage
and result in lower costs. So when we consciously buy goods to promote, we are enjoying some price
break on that in relation to if we were buying the lesser quantity. So that always works.
Inventory levels in terms of what I refer to as end of July or [BOM] August, I would like them to
be a little bit lower than where we ended second quarter, primarily because, last year, we were
starved and pretty much in second quarter, we were chasing a lot of goods in virtually each of the
brands. I even think about our outlet business in Chico’s. They were down 34.5% per square foot. So
they also overachieved and we were chasing goods. So we are going to try to get back in business
for that for both second and third quarter.
It is interesting, when you look at inventory too with our increase in direct-to-consumer, 40%
increase last year, starting off this quarter this year at 47% increase. The inventory for
direct-to-consumer is included when we look at the sales per square foot in the stores. So it
really is not — the comparison of sales per square foot with the increase in direct-to-consumer is
probably a little less accurate than it has been before. I mean direct-to-consumer actually is
worth probably well over 100 stores.
So when you look at it, how do you really come up with sales per square foot? It almost is a
different way of looking at it. And I think that is why, when we look at our business totally now,
it is a much different animal. The business has really changed. The customer shops everywhere and
we just need to be there when she is there. So some of the old measures may be challenged right
now.
Liz Pierce, ROTH Capital Partners.
I will add my congratulations. Most of mine have been answered, but just a quick question on
Soma. Is it the plan to, at some point, build out the outlet business for Soma and if so, what is
the time in terms of building the staff for that? Thanks.
We are already building out the outlet business to tee things up. We used to send Soma
clearance to the Chico’s outlets and we made a conscious decision to remove Soma out of Chico’s
outlets and set up their own outlet business.
What is also interesting about Soma is that, in their outlet business, we also have a fair amount
of full price selling that takes place. So we are getting some incremental margin with respect to
that. So if I take a look at Soma outlets just for this year, we are probably going to add roughly
around 12 outlets.
Janet Kloppenburg, JJK Research.
Good morning, everyone. Congratulations on a great quarter. I was wondering if you could just
talk about Soma and the bottom-line results you are seeing there. I know that the comp was up
nicely and I am just wondering with the increased marketing spend if we should be expecting loss
levels to be lower than they were in the prior year or this investment spending — if this should
be considered investment spending and perhaps loss levels start to subside in the back half of the
year?
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You got it. That is exactly what we are doing is we are investing in Soma. Our goal is not
only to lose less, but actually is to make a profit and that is where we are headed. That is what
we want out of it, but still it is an insignificant part of our business. And even with that, we
had a 30% earnings increase. So I think the other parts of the business are chugging along. As a
matter of fact, I was very pleased with the performance of all three brands for the quarter. They
all three were performing very, very well.
Margaret Whitfield, Sterne Agee.
Good morning and again congratulations. I wondered if you could provide an update on the
sourcing side, cutting vendors, buying piece goods earlier, changing countries of origin, along
with the price increases. And Kent, could you talk about the plan to cut back perhaps on the
couponing in the back half? Could you be a little more specific as to what you intend? Thank you.
So the first question on sourcing, what is the progress there, I would say that we have
consciously added some additional infrastructure both to support the brands, as well as to assist
in the migration of production away from China. It is interesting to note that on last quarter’s
call, Chico’s was already roughly about down to 45% in terms of goods sourced from China. So the
heavy lifting is really with respect to White House Black Market.
On the piece good side, we have continued to — we have continued to take positioning in piece
goods in advance of deliveries. Although of recent note, we have seen a little bit of relief in
cotton prices and as a result of that, our sourcing team has gone back and we have asked for and
received price concessions on what we’d say is more of the cotton-based source of goods.
So the other thing too is that I think it becomes a matter of infrastructure in terms of migrating
because you want to really do test orders when you are going with new suppliers as opposed to
moving entire production runs. So we are embarking upon that initiative as we speak.
The whole couponing thing, I don’t think that we have enough information presently to really
quantify what the impact of that is, other than the challenge that has been thrown to the brands to
try to reduce the amount of discounts by about 10% over the next 18 months. So we have done some
offers in the first quarter so far that have been less. In other words, we have reduced or
eliminated coupons, but just reduced the richness of the offer. So you will have to stay tuned for
our results on that.
Neely Tamminga, Piper Jaffray.
Great, good morning. Hey, Kent, I was just wondering if you could help just reframe a little
bit where you guys are on some of your tech initiatives as it relates to the calendar,
implementation, kind of where you are. Your CapEx I think you said for tech was down, but I’m just
trying to get a sense of what you guys are spending your money on in tech. Thanks.
That comparison was only with respect to first quarter. Our tech budget or our IT budget is
still over $30 million and that is comparable to the last two years’ levels. The big buckets, as we
speak, is we are spending a lot in terms of the direct-to-consumer segment. We are going through an
upgrade with the [ATG] platform and then in addition to that, we have a number of initiatives that
we are doing such as ratings reviews. We are looking at ease of checkout, among other things,
because we think there is a real revenue opportunity to capture some lost sales on people canceling
orders there.
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The big expenditures on software would be in JDA and that is pretty much behind us. What we are
really incurring now is more about development since we are revisiting our enterprise platform and
building some additional functionality, as well as the way to more accurately how we plan our
business in terms of markdown versus full price. So there is a little bit of development there.
Outside of that, the other big piece that comes to mind is concept to PO, which is how we can track
our product development against the calendar. And then the last piece is that we are moving our
data center out of hurricane alley here in Fort Myers, Florida to Winder, George in our
distribution center 2 and what that will really do for us, not only is it from a disaster recovery
perspective good planning, but when we go to the new technology, which is pod technology developed
by Hewlett-Packard, we will basically double our current computing capacity. So hopefully some
aberrations in terms of service interruptions that we currently experience will be reduced. Those
are really the big buckets.
Paul Lejuez, Nomura Capital.
Thanks. It is Tracy Kogan filling in for Paul. Kent, you talked about where you expect
inventories to be at the end of the second quarter. I was wondering if you could help us with how
you are thinking about inventory in the back half both in dollars and also in units. Thank you.
Yes, I think in the back half, dollars and units are probably not going to be at the same
level of increase and the reason I say that is because I think last year we got a little bit ahead
of ourselves in that we — sales didn’t materialize, especially in the earlier part of third
quarter and unfortunately, due to weather, among other things, we took a few more markdowns in the
fourth quarter than we anticipated. So we are going to be a little bit more conservative on that in
the second half.
And then how about the units versus the dollars? Are you ordering units down? What is your
plan there?
Well, I think the units will be up slightly, but not up at the same level that — our increase
in average unit retail because you have to factor in — when you plan in retail dollars, you are
going to get a bump on your average unit retail, which doesn’t necessarily translate into
additional units.
Michelle Tan, Goldman Sachs.
Good morning. Thanks. It’s actually Nicole filling in for Michelle. Our question was, in 1Q,
you were able to grow margin, gross margins even though it seems like you added some new promotions
this year. So can you help us understand what you’re doing on the promotional side that has allowed
you to add these new events and still grow the gross?
I am not sure that we added net promotions necessarily.
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I don’t think we did.
I see anecdotally some of the analysts’ comments when they shop the stores periodically, but
we consciously have not increased our level of promotion. On occasion, you may see a friends and
family event or you might see a percent off redlines for like a holiday weekend, but we have not
consciously increased the level of promotions. In fact, we are planning to have our markdown rates
down to last year across all three businesses for the balance of the year.
Kent, I think what Goldman might be referring to is we have increased the number of e-mails.
They may be tracking that and we have found over the last couple of years that it’s a much more
effective communications tool for us.
I think we have always had Web promotions, but I think the issue is that we are having a more
concentrated effort in developing that direct-to-consumer business. So we are doing Web specials or
specials of the day, but it both helps business in DTC, as well as steers business toward the
stores as well.
Nicole, did you have a follow-up? Okay, Jackie, please.
Robin Murchison, SunTrust.
Hi, good morning and congratulations. I just wanted to — so most of my questions have been
asked, but I will throw one in just about incomers or social media efforts. Anything new, different
that you are seeing, executing or thinking about within that area? Thanks very much.
Well, in social media, it is something that we are really going after. As a matter of fact, we
are segmenting social media from our PR efforts. Right now, it is social media and PR. We are
creating a function that just deals with social media. We think that it is very important to the
future. It really is amazing what is happening. And you can just look at even the reviews that we
are now doing on our products and the way that customers not only review the product, but talk to
each other. So it is something that we believe is part of the future and we are spending a lot more
— putting a lot more emphasis on it in the Company across all brands.
Brian Tunick, JPMorgan.
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Hi, this is Lindsey Bell on for Brian. My question is you have made some good headway in the
Soma business with your focus on margin expansion, but you talk about needing to hit certain
volumes to get closer to profitability. So where does the store base need to get to so that you
reach those volumes to get to profitability?
Well, we believe at the end of this year with 180 stores that we will begin to have certainly
the scale that starts to leverage our profitability. However, when you’re opening up stores at the
rate that we are, there is a building process. A Soma store builds more slowly than the other
brands. I think that is in intimate apparel because you are trying to get a customer to switch
their bra, which is — they are very loyal, they are very product loyal to the bra or the brand
that they are wearing. And I think that that is a challenge and it takes time and it takes trial
before you build it. And I think that is what we are really concentrating on is building not only
existing store volume with the comps, but trying to get the new stores up and performing faster.
So both of those things are happening, and I would expect for us, depending on how much we do in
marketing, it is getting closer and closer to profitability. Again, the smallest quarterly loss
that we have had in that brand I think since 2007 or ‘08.
So the only additional color I would add to Dave’s point about the build is that typically if
you open a new store in specialty apparel, it opens up at about 80% to 85% of average productivity
and then basically comps in year two and year three and then it falls into the base. I think in
Soma’s particular case, I think the ramp-up is as much as four or five years and that is just
trying to build the customer base. So if we can get in front of it with some guerilla marketing, we
might be able to ramp it up with customers a little bit quicker.
From a margin perspective, we had what I would characterize as a decent margin rate improvement for
the first quarter and that was principally to maintain markup. But I can tell you that, in relation
to Soma versus the consolidated results, Soma’s improved markup is much higher than that. We look
for that trend to continue.
Jennifer Black, Jennifer Black & Associates.
Thank you. I was just curious to know if you are launching any new styles on the Vanishing
Back bra.
The answer is yes. We will have I believe it is several new styles for fall.
Great, thank you. Good luck.
Adrienne Tennant, Janney Capital Markets.
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Good morning and congratulations on the quarter. So my question is for Dave and it is really
sort of more of a shopping behavior question. We have obviously gone through some different
economic cycles. As we are starting to go into 2011, we are anniversarying the replenishment cycle.
How are you seeing the consistency of the shopper at Chico’s and then the shopper at White House
Black Market? Are there any differences there? And then my follow-up is really for Kent. Just
minimum cash balance that you want on the balance sheet for operations? Thank you.
It is really all about the product. I think that our brands are as strong as the product
offerings we have and I think that our product offerings have improved and that is what the
customer is responding to. And I think that that is really the key. As long as we can keep the
products compelling and interesting and where the customer feels like they need to come in and buy
something new, we are going to be in good shape. I think that when we rest on our laurels and don’t
keep moving forward in product is when we will have problems.
And honestly, I have reviewed the product assortments through I guess up until holiday and a little
bit into holiday and I feel very, very good about where our assortments are going this year and the
way that we are transitioning seasons, the looks and the collections that we have, the emphasis on
categories and items. So again, as long as we can keep doing that, I think we will be okay
regardless of what is going on around us.
I would say that our customer, being a $100,000 household income customer on average, is more — is
very attuned to the market and what their portfolio is doing. So as long as we have some stability
there, I think we will be just fine and the great product.
And then your question on minimum cash to support operations, I’d really answer it in terms of
cash to support operations and I guess sleep insurance and I would say probably the number would
have to be somewhere in excess of $200 million.
Dana Telsey, Telsey Advisory Group.
Good morning, everyone and congratulations. Dave, you have talked about stretch goals over
time. Now that you are healthy, out of emergency and recovery — I love the analogy — how is the
complexion of achieving the goals changed? Is it by product that is different, like wear to work or
accessories, is it by channel in the direct or outlet and also is there a geography component to
it? Thank you.
Honestly, when I set the BHAG, the big hairy audacious goals, $1 a share back in January and
February of 2009, it was to cause the organization to think differently. And it is the same as we
go to $1.50 in 2013. Incremental progress is not going to get us there. We have to be good at
everything we do. We have to think out of the box. We have to think for new solutions, new ways of
doing things.
And I think that a lot of the initiatives that we have been working on over the last two years,
because of our desire to get to these stretch goals and to proven efficiencies and proven
efficiencies again not incrementally. A tenth here or a tenth there is not going to do it. We need
a couple of hundred basis points in selling expense or store operations. We need a couple of
hundred basis points in margin.
So how do you get there? Knowing what the environment is. And that is what these goals are all
about. And I do believe that with the initiatives we have in place that they are within reach. It
doesn’t mean that it is a certainty, but it certainly feels like that if we catch a break and some
of these initiatives continue to perform the way we think, we have got a shot and that is what we
are working on. And it is causing us to think differently across product, across category, about
the way we operate the stores, about the way we view expense. I mean it is really everywhere. It is
not one place.
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Travis Williams, Stephens.
Hey, guys. This is Travis on for Travis. Just a quick question for you. Actually, I have two
unrelated questions, pretty quick though. The first question is you guys commented that e-commerce
growth by division, each division grew over 40%. I was wondering if you would be willing to share
with us a little more color as to the penetration by segment. In other words, your business is
split roughly 70/30 between the Chico’s/Soma and then the White House segment. Does the e-commerce
business sort of mirror that split as well?
And then my follow-up question is in relation to your share repurchase activity in the quarter.
Clearly, a big step-up from where you guys have been for a number of years here. And could you
comment on sort of the philosophy going forward? Someone just talked to you about the cash balance.
Even if you back out the $250 million you sort of need on hand, you have got a lot of cash and just
wanted to hear your comments on that. Thank you.
Sure, let’s talk about the cash piece first. Repurchase to me is a way to reward shareholders.
Probably isn’t the most efficient use of our cash. I think basically building new stores has the
highest return, but we have increased our growth rate in 2011 versus 2010. And I think that we have
plenty of cash to support our growth in the years ahead.
In terms of the execution on share repurchase, that is opportunistic. We facilitate it through open
market purchases. I don’t believe there is any reason to do a structured transaction. It is not
like we are trying to plan it as part of our EPS projections and trying to accelerate the
accretion. So it is a modest amount and we have had the $200 million authorization out there. We
still have a goodly sum to go and we will reevaluate each quarter as we go along with the Board.
Betty Chen, Wedbush Securities.
Thank you and congratulations on a nice quarter. I was wondering if you can talk a little bit
about the White House Black Market opportunity. If I recall last year, I think there were some
issues with you chasing inventory. And I was thinking about how does that present some
opportunities this year. And then on top of that, if I missed it earlier on the call, I apologize,
but have you discussed what you think might be the potential for opportunity for Soma longer term
and whether that differs by retail and outlet?
The potential for Soma, we believe that when we get the operating model right and it starts
making a profit that we have — it has the potential to be one of our largest brands, if not the
largest brand. Certainly I can see its way to being a $0.5 billion brand and honestly I think it
has the potential to go further. It also probably has the potential to open up more stores, at
least as many stores as Chico’s.
White House Black Market we talked about in terms of their store growth opportunity. We think at
347 stores or something like that in front-line stores that they have the opportunity to probably
be at least 500 in front-line stores, maybe a little bit above that and we only have — I think we
now have 20 outlet stores in there. We are up from 17. And we think that it could definitely be 125
or more outlet stores. So when you add those two together, there is the 250 number that we think
that we can do in White House.
Regarding the second quarter, yes, we think that there is big opportunity in the second half of the
second quarter. White House last spring was catch-up, catch-up. They were turning their inventory
way too fast and as a result, they would sell out of a collection and they would pull forward
another collection. Well, you can only do that so long before it catches up to you and that is what
really happened to us in the June/July period of
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the second quarter of last year. We had nothing else that we could really pull off that was
appropriate because then you are pulling up fall merchandise, which you don’t really want to do
into June.
So honestly, we ran the business way, way too lean and didn’t have the clearance to drive July, it
didn’t have the regular price business to drive June and parts of July and we actually started fall
the first month in August underinventory too. So most of the White House opportunity I think is
certainly in the back half of the quarter, but it is a big opportunity.
Kimberly Greenberger, Morgan Stanley Smith Barney.
Hi. It’s actually Laura for Kimberly. I was wondering if you could provide an update on the
store refurbishments you have in place. At the Analyst Day, you had mentioned a lift in sales for
Chico’s and White House Black Market. I was wondering if you had seen any changes and whether or
not you still plan to refurbish the 70 to 100 Chico’s stores and 15 to 20 White House Black Market
stores this year. Thank you.
We still plan to go through the refurbishments, but it really becomes a question of timing. We
honestly wanted to get through the first quarter coupled with the fact that, when you are looking
at our new stores, we try to open at least 60% of our new stores in the first half, so didn’t feel
it was right to pile on the construction team the refurbishments on top of that. So I look for the
refurbishments to start gearing up maybe as early as July and into the August timeframe.
We have measured ROI on refurbishments and there is a return on the investment, so we will
continue to refurbish our stores.
Thank you, Laura. And Jackie, if I am correct, that is the end of our questions.
Yes, that is the last question.
Two calendar items for everyone. Chico’s FAS annual stockholders meeting will be held on
Thursday, June 23, 2011 here on our Ft. Myers campus beginning at 9 a.m. Eastern time. Also, sales
and earnings for the second quarter will be released Wednesday, August 17, 2011 before the market
opening that day. The tentative earnings release dates for the remaining quarters of fiscal 2011
are available on our corporate website, ChicosFAS.com on the Event Calendar button, as is a replay
of this webcast. Thank you all for joining us this morning. As always, we appreciate your
continuing interest in Chico’s FAS.
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you
all for your participation.
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